The Bush Tax Cuts Just Did Not Deliver

November 19, 2010 10:31 am ET

If the Republican Party's various supply-side arguments for extending the Bush tax cuts seem familiar, that's because they are. The conservative arguments for more tax cuts mirror the lofty claims President George W. Bush made when he signed the 2001 and 2003 tax cuts into law. Bush promised economic growth and sustained prosperity; the economy got neither. In fact, from 2001 to 2007, the country experienced the weakest job growth since the end of World War II. While the nation's millionaires and billionaires got rich, average household income fell for the first time on record. In response to the recession, the Obama administration has proposed extending tax cuts for all but the wealthiest of Americans. Republicans want the rates extended for everyone, including athletes, movie stars, and billionaire hedge fund managers. These people are not likely to spend the extra money and not likely to stimulate the economy, but Republicans swear by discredited economic theories and warn that higher rates will hurt small businesses. There is little evidence for that. In fact, there is no greater evidence that tax cuts for the rich fail to lift all boats than the costly and ineffective Bush tax cuts.

Bush Tax Cuts Failed To Deliver

During Bush Years, Household Income Declined For First Time On Record.
According to a report by the Center for American Progress: "The Bush economic cycle saw the first decline in median
household incomes of any cycle since 1967, when the Census Bureau began
tracking household data."

Bush Tax Cuts Inefficient, Didn't
Stimulate The Economy. According to the Tax Policy Center's William Gale: "Economic
research over the past decade can explain why extending the original Bush tax
cuts is not good stimulus policy. After the tax rebates in 2001, 2003, and
2008, households appear to have spent in relatively short order somewhere
between 25 and 67 cents more for each dollar of tax cut. This makes tax cuts in
general - even the parts of those tax bills that were intended to stimulate - a
relatively weak way to help the economy compared to increases in government purchases,
for which each dollar of increased deficit turns into an additional dollar of
spending." [Tax Policy Center,
9/30/10]

Bush
Tax Cuts Followed By Weakest Jobs And Income Growth In Post-War Period. According
to a report by the Center for American Progress, the Bush tax cuts failed to
deliver jobs and income growth: "This period registered the weakest jobs and
income growth in the post-war period. Overall monthly job growth was the worst
of any cycle since at least February 1945, and household income growth was
negative for the first cycle since tracking began in 1967. Women reversed employment
gains of previous cycles. And for African Americans, the worst job growth on
record was matched by an unprecedented increase in poverty." [Center for
American Progress, February 2009]

Bush Tax Cuts Followed By "The
Slowest Average Annual Growth Since World War II." As the New York Times' David Leonhardt
explains:

Those tax cuts passed in 2001 amid big promises about what they would
do for the economy. What followed? The decade with the slowest average annual
growth since World War II. Amazingly, that statement is true even if you forget
about the Great Recession and simply look at 2001-7.

The competition for slowest growth is not even close, either. Growth
from 2001 to 2007 averaged 2.39 percent a year (and growth from 2001 through
the third quarter of 2010 averaged 1.66 percent). The decade with the
second-worst showing for growth was 1971 to 1980 - the dreaded 1970s - but it
still had 3.21 percent average growth.

The picture does not change if you instead look at five-year periods.
Here's a chart ranking five-year periods over the past 50 years, in
descending order of average annual growth:

[...]

Is there good evidence the tax cuts persuaded more people to join the
work force (because they would be able to keep more of their income)? Not
really. The labor-force participation rate fell in the years after 2001 and has
never again approached its record in the year 2000.

Is there evidence that the tax cuts led to a lot of entrepreneurship
and innovation? Again, no. The rate at which start-up businesses created jobs fell
during the past decade.

Heritage Foundation
Budget Guru: Bush Tax Cuts Played Some Role In Lower Revenues. As the Heritage Foundation's Brian Riedl
admits: "the 2001/2003 tax cuts played some role in keeping revenues below
their historical average for most of the 2000s, but the country was also
recovering from a recession at that time, too." [Heritage Foundation, 7/29/10]

Bush Cuts Followed By
Slowest Jobs Growth Since The End Of World War II. According to a report by the Center for
American Progress, "from March 2001 to December 2007
the economy added 1.8 million jobs for workers aged 25 to 54, only 22,000 per
month. That translates to an average annualized growth rate of only 0.3 percent
per month-the slowest of any cycle on record since the end of World War II and
one-fifth the growth rate during the 1990s."

Bush Tax Cuts Are Costly, Add To Deficit And Debt

The Bush Tax Cuts Are The Primary Driver Of Federal Budget Deficits
Over The Next Decade. Below is a chart from CBPP showing the deficit
impacts of war spending, financial recovery spending, the recession itself, and
the Bush tax cuts:

Continuing Bush Tax Cuts Doom The Long-Term Fiscal Picture. As the Tax
Policy Center's
William Gale has explained: "The deficits we face over the next decade reflect
a fundamental imbalance between spending and revenue, one that goes beyond
entitlements. Based on projections by the CBO, Alan Auerbach of the University
of California at Berkeley and myself, among others, even if the economy returns
to full employment by 2014 and stays there for the rest of the decade, the
continuation of current fiscal policies, including the Bush tax cuts, would
lead to a national debt in the range of 90 percent of GDP by 2020. That's
already the highest rate since just after World War II -- and Medicare, Medicaid
and Social Security aren't expected to hit their steepest spending increases
until after 2020." [Washington Post, 8/1/10]

Extending Bush Tax
Cuts "Would Increase The Debt By An Amount Roughly Equal To The Size Of The
Economy." As the Center for Budget and Policy Priorities points out, tax
cuts do not pay for themselves. In fact,
if an unpaid-for extension is enacted, by 2050, the national debt "would
increase the debt by an amount roughly equal to the size of the economy."

Expiration of Tax Cuts Won't Hurt Small Business

Less than 2 percent of tax returns reporting small-business income are
filed by taxpayers in the top two income brackets -- individuals earning more
than about $170,000 a year and families earning more than about $210,000 a
year.

And just as most small businesses aren't owned by people in the top
income brackets, most people in the top income brackets don't rely mainly on
small-business income: According to the Tax Policy Center, such proceeds make
up a majority of income for about 40 percent of households in the top income
bracket and a third of households in the second-highest bracket. If the
objective is to help small businesses, continuing the Bush tax cuts on
high-income taxpayers isn't the way to go -- it would miss more than 98 percent
of small-business owners and would primarily help people who don't make most of
their money off those businesses.

Allowing Tax Cuts For The Rich To Expire
Will Not "Adversely Affect Small Business And Job Growth." According to the
Congressional Research Service, "Research has shown that tax cuts directed to
high income taxpayers have a small stimulative effect because they tend to save
any additional income. Increasing tax rates for the richest 2% of taxpayers (by
allowing the high income tax cuts to expire) will likely neither significantly
decrease consumer expenditures nor adversely affect small business and job
growth." [Congressional Research Service, 10/27/10, internal
citation deleted for clarity]

Just 12 Percent Of Money Raised By Increasing Top Rates Comes From
"Small Businesses With Actual Workers." As reported by Businessweek:
"The nonpartisan Congressional Research Service, which analyzes issues for
lawmakers, largely agreed with Obama in a Sept. 3 report that considered only
taxpayers with employees. Its conclusion: Small businesses with actual workers would
pay only about 12 percent of the higher taxes. 'Across-the-board
tax cuts for high-income individuals are not efficiently targeted to small
businesses,' wrote author Jane G. Gravelle." [Businessweek,9/23/10]

Only 3 Percent Of People In Top Brackets Have Any Business Income At
All. From the Center for American Progress: "But according to the
Joint Committee on Taxation, just 3 percent of people with any
business income at all-from an enterprise large or small-face either of the top
two income tax brackets, which are the ones in question.
Conservatives eventually conceded this point, but pivoted to the literal
number of 'small businesses' that they claim will be affected if the tax cuts
for the rich expire." [Center for American Progress, 11/15/10]

Bloomberg: GOP Definition Of Small Business Includes
"George Soros, Most Movie Stars And Obama Himself." According
to Bloomberg:

Senate Republican leader Mitch McConnell says President Barack Obama
wants to subject half of all small-business income to a tax increase, a move
that he says would strike a blow at the U.S. job-creation engine.

McConnell's numbers only add up if you consider people like billionaire
investor George Soros, most movie stars and Obama himself small-business
owners, tax experts say.

That's because the lawmaker is basing his figure on a broad definition
of the term that experts say includes authors, actors and athletes who employ
few if any workers. It also encompasses businesses that many people wouldn't
consider small, such as Soros's hedge-fund firm and major law partnerships. [Bloomberg,
9/20/10]

Allowing Tax Cuts For The Rich To Expire
Wouldn't Stifle Economy Recovery. According
to the Congressional Research Service, "allowing the tax cuts targeted to high
income taxpayers to expire as scheduled could help reduce budget deficits in
the short-term without stifling the economic recovery." [Congressional Research
Service, 10/27/10]

More Money For Millionaires

Richest One-Tenth Of
1 Percent Will Benefit Most From Extension Of All Tax Cuts. As Princeton economist Paul Krugman explains, "the majority
of the tax cuts would go to the richest one-tenth of 1 percent. Take a group of
1,000 randomly selected Americans, and pick the one with the highest income;
he's going to get the majority of that group's tax break. And the average tax
break for those lucky few - the poorest members of the group have annual
incomes of more than $2 million, and the average member makes more than $7
million a year - would be $3 million over the course of the next decade." [New York Times, 8/22/10]